Analysts bullish on Nykaa's long-term growth despite 59% drop in Q3 profit

Brokerages have ratings ranging from "Overweight" to "Buy", with one brokerage having a "Reduce" call. The highest target price of Rs 2,420 translates in an upside potential of up to 41 per cent

Shares of FSN E-Commerce Ventures, the parent company of beauty e-tailer Nykaa, crashed over 8 per cent and hit a low of Rs 1,696 apiece in Thursday’s intra-day trade on the BSE, as the company's net profit dropped 59 per cent to Rs 28 crore in the December quarter of fiscal year 2021-22 (Q3FY22).

The shares, eventually settled at Rs 1,712 per share, down 7.45 per cent on the BSE, as against a 0.8 per cent rise in the benchmark S&P BSE Sensex.

But this hasn't deterred analysts from staying bullish on Falguni Nayar-owned enterprise. Brokerages have ratings ranging from "Overweight" to "Buy", with one brokerage having a "Reduce" call. The highest target price of Rs 2,420 translates in an upside potential of up to 41.3 per cent.   

The key reasons, they say, include solid topline growth despite a healthy base, sequential margin expansion, and robust improvement in gross merchandise value (GMV).

Quarterly results released on Wednesday showed that Nykaa's GMV grew 49 per cent year-on-year (YoY) driven by 32 per cent and 137 per cent YoY growth in beauty and personal care (BPC) and Fashion segments, respectively.

While the company saw a relatively lower GMV to Revenue conversion, there was a sharp uplift in gross margin to 46.3 per cent, up 359 basis points sequentially, driven by higher mix of fashion, higher mix of higher end products in BPC, and increasing share of owned brands.

Though analysts view record gross margin figure as a result of festive season shopping, which may have led to higher mix of BPC products, they believe the other two reasons would continue to sustain even going forward.

Overall, Nykaa's gross margin improvement also lifted Ebitda (earnings before interest, tax, depreciation, and amortization) margin to 6.3 per cent despite advertising expenses accounting for 14 per cent of revenue.

Analysts at IIFL Securities say Nykaa's YoY performance was satisfactory with the overall revenue growth of 36 per cent at Rs 1,098.4 crore. BPC average order value (AOV0 grew 3 per cent QoQ, and number of orders grew 31 per cent and 25 per cent YoY and QoQ, respectively.

Fashion segment GMV growth of 17 per cent QoQ was muted, given that the segment is quite nascent. While AOV at Rs 3,590 was the highest ever (10 per cent QoQ growth), growth of 8 per cent QoQ in the number of orders was low on account of the company trying to strike a balance between profitability and growth.

"We expect margins to recover in FY23 on the back of normalcy in sales as Covid abates; normalisation of ad spend after a high FY22; and stabilisation of fulfillment cost as supply chain normalises and new warehouse operations get optimized," IIFL Securities said.

Those at Kotak Institutional Equities, meanwhile, believe ad-spends will stabilize at 11-12 per cent of revenues in the next 2-3 quarters though quarterly volatility will remain.

Given this, they have trimmed their FY22-24 revenue forecasts by 2 per cent to bake in the performance of the first nine months of the current fiscal (9MFY22), largely on lower BPC revenues.

"We assume higher gross margins, though we also bake in higher store opening costs resulting in higher depreciation/interest cost. This results in 2-3 per cent earnings per share (EPS) cut for FY22-23," they said.

Nykaa accelerated store expansion this quarter, with 12 new physical retail stores across the country including stores in Tier 2/3 cities such as Jodhpur, Rajkot, and Trivandrum. The company’s total operational physical store count was 96 as of December 31, 2021 in 45 cities.

Besides, it launched more private label products in skincare, cosmetics and hair care segments, and expanded warehousing capacity by 135k sq.ft in Q3.

That said, concerns such as likely increase in competitive intensity, with Tata, Reliance, Purplle, MyGlamm and Myntra vying for an aggressive ramp-up, decelerated growth in fashion, sharper than expected rate-hike environment (affecting its weighted average return on equity), and non-sustenance of higher AOV remain key risks to Nykaa’s growth, analysts say.

Source: Brokerage Reports